Not All Roses The Importance of Personal Rewards The Opposite of Cushy Brand Consistency Recalcitrant Franchisees Lack of Funds Not the Right Concept In Summary PART II
Moving Forward CHAPTER 4
The Right Advisors The Business of Franchising Is Unlike Any Other Finding the Right Franchise Attorney Finding the Right Financial Advisor The Real Estate Connection Procurement Advisors and More In Summary
An Operations Manual Is a Beautiful Thing The Value of a Professionally-Prepared Manual
A Lesson in Excellence You Get What You Pay For Details, Details A Never-Ending Cycle In Summary CHAPTER 6
What Else Do I Need Before Bringing My Franchise to Market? The Need for Consistency The Importance of Buy-In Give Them the Proper Tools The Internet—A Powerful Marketing Tool Language and Tone The Best Marketing Tool Ever Grassroots Marketing Public Relations Direct Mail The Goodwill Advertising Budget The Marketing Makeover In Summary PART III
Rolling It Out CHAPTER 7
“Selling” It All Your Ducks in a Row The Right Attitude The Suitable Franchisee The Right Fit A Savvy Approach The Importance of Allowing for Breathing Room The Importance of Personality Profiling Women and Minorities Interviewing The Review Committee Communication Discovery Day A Word about Earnings Claims Master Franchising Financing In the Beginning Challenges for Startups
Once You Sell For Those Who Have Made Mistakes in Selling Units In Summary CHAPTER 8
Train ’Em A Numbers Game Critical Training Tips Before a Franchisee Opens a Unit Training Practices for the Franchisee’s Opening Best Practices for Ongoing Training Avoid These Mistakes In Summary
A Perusable Website That Global Presence A Strong Website Entices both Prospective Franchisees and Customers What Every Website Needs In the Beginning The Importance of Working with Someone Reliable In Summary PART IV
Keeping It Going CHAPTER 10
Advertising, Marketing, and Public Relations Ways to Build Buzz Advertising Internet Advertising Media Coverage and Public Relations A Word About Coupons Grassroots Strategies In Summary
Online Support The Intranet as a Training Tool A Matter of Convenience A Caveat The Intranet as a Communications Tool For Franchisors If at First You Don’t Succeed And Don’t Forget Branding Not Enough by Itself In Summary
Fine-Tuning Your Program Join a Professional Association Build a Team Consider the Company-Owned Store Increase Your Offerings Evaluate, Evaluate, Evaluate Build a Culture Achieve Unit Economics “Never Sit in One Spot” In Summary
Dealing with Recalcitrant Franchisees Different Kinds of Wayward Franchisees Your Options Communications Go a Long Way Audits The Tough Questions Prevent Issues Whenever Possible Manage Their Expectations Reasons to Stay Proactive When Not Everyone Is On Board In Summary
Best Practices of Top Performing Franchisees Dr. Casey Cooper, Franchisee, It’s A Grind Laurie Baggio, Franchisee, 1-800-GOT-JUNK? Jim Roark, Franchisee, Mr. Appliance Mitch Cohen, Franchisee, Dunkin’ Donuts and Baskin-Robbins In Summary
Creating an Exit Strategy Bullish on Franchising Timing Is Everything The Importance of Planning Going Public Other Options In Summary
Franchise Disclosure Document
Guidelines for an Operations Manual Operations Manual
Table of Contents APPENDIX C
Franchise Resources Experts
Glossary About the Authors Index
e thank all of the knowledgeable franchisors and professionals who so willingly shared their stories, experiences, and areas of expertise. We are especially grateful to Fred DeLuca, co-founder and president of Subway, for his early support of this book. We thank the design, editing, and marketing team at Entrepreneur Press, and especially Editorial Director Jere Calmes and Acquisitions Editor Courtney Thurman. And our gratitude goes to Bob Diforio, who helped make this book possible. Of course, we would like to thank our families. In particular, Harold thanks Felice, Ben, Michelle, Mike, and Nathan, for their support during his many long and arduous years working in this very exciting industry, and in loving memory of his sister, Arleen Kaye, a truly inspirational lady. Adina especially thanks Michael, Alyssa, and Ethan and her extended family for their enthusiastic encouragement.
Foreword by Fred Deluca
s anyone familiar with my story knows, when my family friend and business partner, Dr. Peter Buck, wrote me a $1,000 check to launch Pete’s Super Submarine’s (now known as Subway) in 1965, we never dreamed of growing it into the brand it is today. Initially, our goal was opening a submarine sandwich shop where customers could enjoy a sandwich and I could build up enough revenue to pay my college tuition at the University of Bridgeport. Like most entrepreneurs, we made our share of mistakes. We also learned a lot along the way about the sandwich business, building up a customer base, keeping vendors happy, selecting the right location, and turning a profit. We learned to think on our feet, take risks, and remain persistent. Most importantly, we learned to think boldly. For instance, we opened our second store, even though our first store performed dismally, just to help build our brand. And, like most successful owners, we could not have achieved even a fraction of our success without the support of family—in particular, my parents who, in the early days, helped with strategy and developed important relationships with vendors. While these ingredients were an integral part of our story, they were not enough to get our business to the next level. Our goal was to have 32 stores by 1975, but by 1973 we were only half way there. So we looked at franchising. We knew very little about franchising at the time. But I knew I needed a first franchisee. Here, persistence helped. In 1974 I asked my good friend Brian Dixon to step up to the plate; I even offered to loan him the funds to get started. Leery of the risks in starting the business, Brian at first declined, opting instead for his 9-to-5 job and the steady paycheck. But when his employer went bankrupt a few months later Brian suddenly found franchising appealing. Family members again helped us with our initial growth. My aunt and uncle opened our first New York store in Staten Island, and my wife’s brother opened a store in Springfield, Massachusetts. With that came calls from people seeking franchise opportunities, and Subway soon opened franchise locations in other states. Franchising enabled us to get to 200 stores by 1982, and thinking boldly again, we set an extremely aggressive goal of having 5,000 stores operating by 1994. Many were skeptical of our ability to achieve that goal, but when you have a solid business system in place; when you have happy franchisees who want to open additional units; and when customers become ambassadors of your brand, returning again and again with their family and friends, who in turn become regular customers at other locations, business flourishes; aggressive goals can be met through the power of franchising. Today, with 85 percent of our 27,500 locations operating in North America, and a growth pace of 2,000 units per year, we’re well ahead of our goal of having 30,000 outlets operating by 2010.
Simultaneously, we are building the foundation for strong international growth in 85 countries, and, if we build a good foundation, I believe that Subway will be operating more than 50,000 restaurants worldwide by 2020. By definition, franchisees contribute greatly to the success of any franchise company. While running their everyday operations they make observations and develop opinions, and it’s important to include them in the decision-making process in a constructive setting. For instance, we have franchisees who sit on local and national advertising boards to decide how to spend our advertising dollars. Not everyone in the franchise community would recommend this strategy, but it worked for Subway. Many would argue that this level of decision-making should stay only at the corporate level. Yet some of our best ideas have come from our franchisees, including our “seven under six” campaign, promoting seven sandwiches that featured six or fewer grams of fat. Another success story? Jared Fogle, the Indiana University student who lost 245 pounds by eating two Subway sandwiches a day. After the media picked up Jared’s story, one of our Chicago franchisees suggested creating an ad campaign around it. Jared’s now famous, and the campaign has helped position Subway as a destination where anyone can find heart-healthy, low-fat food, at great value. Back when we first started, franchising was hardly the phenomenon it is today. It has grown into a vital economic force, enabling more and more people to achieve the American dream. The number of franchisors seems to have grown tenfold since we began franchising in 1975. Even Ray Kroc, who grew McDonalds into the brand it is today, was a relative unknown back then. Things have certainly changed over the years! But some elements have not changed at all. To make a go of franchising, you need capable franchisees who understand your product or service, and know how to turn a profit. You also need expert advice. I first met Harold Kestenbaum in 1986 at the International Franchise Association (IFA) Convention in Maui, Hawaii. He was introduced to me by a writer for Restaurant and Institutions magazine and we got to know each other during the few days of convention activities. Harold has become synonymous with franchising: he has advised some of the most popular franchises, from the startup phase to the established. Along with business journalist Adina Genn, Harold has written this book, with you, the small-business owner, in mind. I wish I had had a similar guide when I first took a look at franchising. The wisdom shared inside the pages of this book—spelled out by Harold, along with experienced franchisors who reveal their trials and tribulations—might have spared me some of those sleepless nights that entrepreneurs encounter whenever pushing on with something new. I wish you every success in your journey—this book will certainly help you. —Fred DeLuca President and Co-founder Subway
ou don’t know what you don’t know. We hear this expression routinely from franchisors, both new and established. This is because in franchising there are so many critical details, from designing the concept to competing for quality franchisees to training to marketing and much, much more. Well, you see the picture: It is impossible to know everything. Which is why we wrote this book. In our everyday dealings with new and “wannabe” franchisors we realized where they struggle. And in our regular dealings with seasoned franchisors, as well as the franchise experts well versed in growing a system from the ground up, we recognized a passion to mentor. So we decided to bridge that divide by collaborating on this book. This book is designed primarily for entrepreneurs thinking about franchising their business but who are in need of critical information. It is also chockfull of strategies that existing franchisors can apply to their system and help grow it to the next level. It also provides useful insights for would-be and existing franchisees who want to know more about the industry so that they can be successful in their endeavors. For instance, Chapter 14, “Best Practices of Top Performing Franchisees,” features successful franchisees who talk about what drew them into franchising, and how they make the system work for them. This chapter will also benefit franchisors who are eager to understand the traits of a quality franchisee so that they know what kind of characteristics to look for when awarding franchises. These qualities are important, for as this book demonstrates, in order to grow, a franchise system needs so much more than just a franchisee who can write a check. This book is also designed for consultants to franchisors who want to improve their service to clients, whether offering support in marketing, accounting, law, web design, or sales, and more. Once you immerse yourself in the world of franchising, you will see that it is a very tight-knit community filled with a pay-it-forward spirit. One person shares wisdom with another and, as a result, that person, ever grateful for the spot-on bit of business advice, helps the next newcomer to the industry. Speak with experts in California, for instance, and they invariably recommend that you also call another expert in, say, Virginia, and to use their name as a referral. Sure, this trait exists in industries everywhere, but it seems especially prevalent in franchising. We tried to capture that spirit in the pages of this book, where you can read about franchising luminaries such as Fred DeLuca and others who share their stories for the purpose of mentorship. Though franchising is not for everyone, it is a powerful method of distributing goods and services to both consumers and other businesses. In many ways, franchising is a system like no other. Yes, you can make a handsome living, but you will work hard for it. And the successes are not only found on the franchisor side. In fact, sometimes, those on the corporate side believe in the system so strongly that they become franchisees themselves. In other instances, franchisees switch sides and join the management side of a franchisor. Such scenarios are not unusual, and serve as a testament to the power of franchising: When it works well, it really works. To work, your concept must be franchisable, meaning it can be replicated in a cost-effective manner and with consistency from unit to unit. To build a powerful franchise you will need to build a
solid infrastructure. That means choosing the right advisors to guide you in areas that will sometimes be unfamiliar. It means creating an operations manual that is easy to follow for both franchisees and their employees. It means developing a business plan and a marketing plan. It means learning how to find the right franchisees to help you build your system, and training them so that customers enjoy the same brand experience whether they are in Montana or Maine. We cover all of these components in this book. With a solid infrastructure in place and an environment where there is constant support—in the field, on the phone, via email, and through online training methods that are available to franchisees 24/7—you may be on your way toward building a regional or even national or international brand. We wrote this book for two reasons: We wanted readers to understand precisely what is needed to start and grow a franchise company, and we wanted them to understand if they have what it takes to do so—before they spent perhaps hundreds of thousands of dollars and years of their life pursuing what might be the wrong endeavor. In the following pages we examine the tools needed to start and grow a franchise. Part I covers the reasons for franchising. Part II focuses on how to move a concept forward. Part III discusses how to roll out a system. Part IV looks at how to keep a system going. There is also an appendix that features the items contained in a Franchise Disclosure Document. As a franchisor you will need to take a proactive stance and keep the lines of communications open with franchisees so that there are no surprises. Sometimes this means dealing with franchisees who are no longer pulling their weight. A difficult predicament, for sure, but not uncommon. And, again, no one said franchising would be easy. Yet the system offers rewards like no other. Read on to see how you can build what truly may be the next national brand, and one that enables hardworking people who share your mission to become business owners.
I Why Franchise?
1 The Benefits of Franchising
et’s say you own a gym. Not just any gym, but the best gym in town—that’s what your clients and trainers tell you. You aptly named the gym “Fit,” and the moniker doesn’t just describe your clients, it depicts your business. The place is immaculate, well located, and features the best equipment. No wonder the place is humming from 6 A.M. to 10 P.M. The gym practically runs itself. Your trainers are the finest in the area and they know how to treat customers. Your services are priced fairly. Your programs are scheduled to attract early-morning commuters, moms, kids, athletes, and the corporate crowd. And your marketing plan works like clockwork, enticing folks to keep their New Year’s resolution in January, shape up for spring in March, and take advantage of cool summer specials in June. One day, you have a vision. You imagine your gym not just in your town, but in the next town over. And the town beyond that. And in the next county. OK, throughout the entire region. Suddenly, you envision going national, even international. For a moment, it all seems possible. You could simply duplicate your fool-proof operation so that there are hundreds of well-located, immaculate Fit gyms not around the country, but across the globe. Then reality sets in. Where would you get the capital? A bank? Maybe a banker would loan you the money to open a second location. But to expand rapidly? Not so likely. Venture capital? That could mean giving away the farm, which is what most early venture firms would expect in return. Plus, you would then need to contend with the hassle of someone looking over your shoulder, telling you how to run Fit. Most entrepreneurs would not find that scenario all that appealing. We know we wouldn’t.
With franchising, people pay you for your proven business model. Even better, they pay royalties. But you will need a good concept, good management, and the right amount of capital to be successful. A franchise can be defined simply as an entity that has three factors: 1) the grant of trademark rights, 2) a prescribed marketing plan, or significant control or assistance in the operation, or a community interest, and 3) payment of a franchise fee for the right to participate.
Then it hits you: Franchising. By franchising, people will actually pay you for your tried-and-true business model so that they, too, can run a profitable enterprise. Even better, they will pay you royalties based on their sales. But does franchising really work? It has for more than 50 years and, for the most part, successfully. The history of franchising is filled with success stories. Ray Kroc got his start as a mixer salesman whose California clients, brothers Dick and Mac
McDonald, ran a popular hamburger restaurant, McDonald’s. Mr. Kroc purchased the restaurant and transformed it into today’s giant operation through franchising. Fred DeLuca, the Subway Restaurant founder, launched his business as a 17-year-old when a family friend wrote him a $1,000 check so that he could open a sandwich shop in Connecticut. After opening 32 other Subways in the state, the company grew nationally and internationally by franchising. Tom Carvel, the famous ice cream maker, launched his business with a $15 investment, selling ice cream from a truck. Later, as a refrigeration consultant and concessionaire, he taught shopkeepers how to create his ice cream for a flat fee and a percentage of the sales—in other words, through franchising. William Rosenberg created Dunkin’ Donuts from a small “roach coach” in the Boston area. David Sandler, founder of the Sandler Sales Institute, sold his sales training program to Fortune 500 corporations as well as small- and medium-sized companies. Gary and Diane Heavin, founders of Curves for Women, grew a small chain of women’s only 30 Minute fitness centers in Waco, Texas, to an international chain of more than 6,000 such fitness centers.
Quick Stat Franchises generate a total economic output of more than $1.53 trillion according to the International Franchise Association. The list goes on to include a host of other franchising luminaries. Of course, these names are legendary in the franchise world. But don’t be intimidated into thinking that franchise success stories are only attainable to a select few. Nothing could be further from the truth. With a good concept, good management, and the right amount of capital to get you started, you can build up a solid enterprise, even if you decide to grow only regionally.
Once you begin franchising, you have new responsibilities: namely, selling units and supporting your franchisees. As the franchisor, you assume the role of working on your business, not in your business (a mantra made famous by Michael Gerber in his book, The E-Myth Revisited). If you are franchising Fit, the gym we mentioned earlier, your job is no longer the business of running the individual fitness center, but the business of finding others to open and run more fitness centers. The beauty is that these people are paying you perhaps hundreds of thousands of dollars in fees and between 4 percent and 8 percent in royalties for that privilege—and that they are earning a living as well. In 2006, more than 300 small-business concepts adapted the business-format model of franchising, demonstrating a continued increase in the industry’s growth, according to a report issued by the International Franchise Association’s Educational Foundation. In fact, the 2000s have shown explosive growth for franchising. From 2003 through 2005, 900 new franchise concepts were launched in the United States.
Franchise companies added nearly 30,000 new establishments to the U.S. economy in 2006, according to the International Franchise Association.
There are numerous reasons to franchise your business. You need additional capital, so why not use franchisees’ money? You need people to open more Fit centers; who better than an owner/operator who has “skin in the game”? People who buy franchises have their own money invested in the venture, and for this reason you know that they will work harder than if they were mere employees of your business. But the rationale doesn’t stop there. By franchising, you can open numerous Fit centers before your next competitor pops up. And, though you probably know nothing about real estate in the next county or state, for that matter, in all likelihood your local franchisee has in-depth knowledge of the area, or knows the real estate brokers who can assist in finding the right location for his or her Fit center franchise. Then there is your exit strategy. Let’s be honest here. Owning one or two Fit centers is not going to provide much of a retirement cushion for you. However, going public, selling your chain of Fit centers to an industry giant, or having a legitimate equity firm buy a majority of your stake, certainly will. Of course, not all franchise concepts make it big, or become huge successes, but if you are not in the game, you are never going to find out, will you? Franchising is booming today because it works. You are, in effect, providing a turnkey operation —with all the tools needed to immediately open for business—so that others can emulate your proven method and reap the benefits. Though food is the fastest growing franchise sector, other segments are growing as well. Fitness, education, and pet care are all thriving. And specific categories within the food sector are flourishing. For instance, Tex Mex shows particular promise. Other than Taco Bell, there are few Tex Mex franchises around—yet. A savvy entrepreneur could do well by growing this concept regionally. Indeed they are already doing so: the category now includes Del Taco, Chipotle, Baja Fresh, and smaller players are also getting into the action.
Quick Stat Fast food makes up 19 percent of the franchising sector, while retail and service businesses make up 11 percent each, according to the IFA.
If franchising sounds like the right direction for your business, congratulations. It is a terrific adventure, exposing you to people and potential you might not otherwise encounter. But, like any endeavor, you will want to move forward strategically, armed with an arsenal of knowledge and assisted by professionals who have been in the game for many years so that you have the appropriate tools to reap handsome rewards.
IN SUMMARY Franchising is a terrific way to turn a company into a regional, national, or international sensation. But you will need a solid concept, adept management, and the financial resources to be profitable. By franchising
People will pay you for your proven business model so that they, too, can run a profitable operation. People will pay you royalties based on their sales. Your concept can grow regionally, nationally, or even internationally. You are creating a viable exit strategy for when you are ready to retire. You are following a model that has worked for more than 50 years, for the most part, successfully.
2 Not So Fast
ou are sold on franchising. The market seems ripe with opportunity and the rewards—fees and royalties you will receive—could not sound more promising. You are excited about seeking out the right franchisee prospects and sharing your expertise with them, so that they, too, can thrive. Truth be told, you are ready to charge full-speed ahead. Not so fast. There are many factors to consider first. Ask yourself if your business is truly franchisable. you can afford to do it. your personal life can handle the process.
A “franchisable” business is one that is profitable, has the ability to be replicated, and has a documented system that is easy for others to follow.
If you are used to taking entrepreneurial risks, franchising may seem like any other gamble. Think again. Franchising requires a substantial amount of time, effort, and patience. It also requires traveling to franchisee locations to assist with site selection, training, and support. Simply put, those who presume they can continue to run their own location and build up a franchise venture are in for a big surprise. For starters, not every business is franchisable. You might argue otherwise. Even if people are walking into your place of business and marvel, “This is a great concept!” and beg you to sell it to them, that is not enough of a reason to franchise your business. Ask those prospects to show you the money, and that is probably the last time you will hear from them.
Keep your focus. Franchisors who believe they can run their own location while also growing their franchise system invariably find they cannot do both well.
To determine if your business is franchisable, see if the following criteria apply to you: Do you have a proven operation that is making money? Have you been in business for six months or longer? Do you have good management in place? Do you have between $100,000 and $150,000 in capital to invest in the franchise program? Do you have in place, or have access to the proper legal representation and advisors who are
well-versed in franchising? Do you have the time to pursue the endeavor? Will you find the endeavor fulfilling? Let’s explore these criteria in greater depth. To determine if your business is franchisable, you need a proven operation. Having more than one location would be preferable so that you can ensure that you have worked out any kinks, and to help validate that your initial success was not some sort of fluke. There are, of course, exceptions to this rule. There have been many franchisors who start out with a concept, and even though they were not operating for any great length of time were still able to franchise their business successfully. This can be seen in the non-bricks-and-mortar franchise systems —those where the franchisee can operate from a homebased business or that provide services as opposed to products. Nevertheless, retail-oriented franchises do need at least six months or even a year to determine their viability and whether another person (the franchisee) can make a go of it successfully. It will take at least this long, or longer, to make sure that everything works properly, that your product mix is right, that your marketing strategies work properly, that your pricing formulas work correctly for the area in which you are operating. A track record of at least six months is critical, and if you cannot accomplish this, you are not ready. Please do not think that if you are bent on franchising a retail concept, like a restaurant, and do not have at least one prototype operating, that you can accomplish the franchise model. It is not going to happen, period. During the course of writing this book a gentleman called Harold and said he wanted to start a franchise program. But, he said, he only had a concept, and did not have an operating prototype. Asked what the concept was, he said it was a pizza venue. This prompted a chuckle, because this poor soul thought he could join one of the most crowded spaces in the food industry without having an operating restaurant. Harold told him that he really had no chance unless he built a restaurant and actually operated it for at least six months or a year. He was another example of an overly optimistic entrepreneur who wanted to get into the game, but had no real chance of success.
Don’t start franchising until you have at least one proven operation that has been in existence for at least six months to a year. You will need this time to determine if the concept is viable, and if another person could make a go of it successfully. It is very difficult, if not impossible, to attempt to franchise “a good idea.”
If you are not making money—or worse, you are losing your shirt—franchising is, in all probability, not a good option. Unless, of course, there is a good reason for losing money, such as perhaps operating out of a bad location. Frequently, a bad location will doom any business, even a franchise operation. The old saying, “location, location, location,” is vital for a successful franchise operation. For example, if your restaurant is not in the right spot in a regional mall, it will make no difference how many people shop at the mall, they may never walk past your site. The same applies to which side of the road you are located on. If you are a breakfast/coffee business and your location is on the return-home side of the street, you will miss out on a substantial number of potential customers. And if the parking is not easily accessible, you will lose additional customers as well. You will need much more than a good concept before you can safely deem your business franchisable. Good management is vital. If you have never previously operated a thriving business,
you may consider bringing in a person who has successfully operated a franchise chain. In fact, you might even consider giving this person equity in the franchise company in order to help you develop the franchise model. Many good business people who have never experienced the franchise model try their hand at franchising, only to run into problems later. Thus, it is often ideal to bring in a person, whether they be an experienced franchise director or an operations person from a franchise chain, to work with you to help you through the process of becoming a successful franchisor. Retaining good consultants and other professionals is critical, but they are not going to be by your side each and every day. The hiring of such a person shortens your learning curve and gives you the competitive advantage that you will not have if you are not familiar with franchising.
There are at least 20 states with some type of franchise law that deals with selling franchises and a number of states that have franchise relationship laws.
Additionally, you will need between $100,000 and $150,000 in capital to properly put together your franchised business. It will be money well spent. It will enable you to hire a franchise attorney (an attorney who specializes in representing franchisors) who will create a Franchise Disclosure Document (FDD). A document legally required to be given to prospective franchisees, it describes the offering and the investment that the franchisee must make, and gets filed with a number of states even before you can sell franchises in those particular states. (See the appendix for what makes up a FDD.) Franchising is a highly regulated industry; if you do not have the proper legal guidance, you risk exposing yourself to serious trouble, trouble that could be very costly and time consuming to rectify. The initial capital will also cover expenses to hire an experienced franchise consulting company who will produce an operations manual, a brochure, a website to help you market your franchised business to both consumers and potential franchisees, and a franchise-knowledgeable accounting firm because your FDD must have an audited financial statement, which must be written on an annual basis.
You will need between $100,000 and $150,000 in capital to properly put together your franchised business. There is no question that franchising requires a sizeable investment, which will not typically show any return for up to three years while you are ramping up the system. For many, this is a difficult amount of money to raise. So weigh your options carefully. Banks typically are not interested in financing such speculative ventures. Some would-be franchisors look to venture capitalists but keep in mind: with VC money, you will have to give away a great deal of equity, including control of the company, at the inception. Most likely, this is not what you want to do. If at all possible, try to raise the funds through family or a second mortgage on your home, or take it out of your existing business. Always keep in mind that if you are not successful, this money cannot be recaptured, and if borrowed, must be paid back. Although rare, some newer franchisors who lack sufficient capital to develop a worthwhile franchise program will find an equity partner to fund the project. That equity partner will typically receive a percentage of the newly created franchise company. The percentage can vary, but Harold has seen as much as 50 to 60 percent of equity given up for this seed capital. It is very expensive money and many young franchisors are reluctant to give away so much of their company. Although not very common, some investors will agree to permit the franchisor to reacquire the equity
in the future, at a significant premium. This is a risk for the franchise company since the premium can be very high. On occasion, and again, rare, Harold has heard of young franchise companies finding someone with a particular expertise in franchising also who can invest capital. This is not common and no company that has done this successfully comes to mind. Since the end of this last recession, many venture capital firms have made a conscious effort to seek out new and emerging franchisors to invest in or acquire. They realize the enormous growth potential of the franchising industry, and have made sizeable monetary payments to founders of franchises. Sometimes the cost alone is enough to deter an entrepreneur from franchising. For instance, an interior designer who specialized in Feng Shui received numerous calls from other designers eager to buy her concept. She thought that franchising was the way to go, so she called for advice. We explained to her what the costs would be to start the franchise process. She did not have sufficient money and passed on the idea. The fact that she did not have the start-up capital does not undermine the integrity of her concept, but this particular would-be franchisor decided that the circumstances were not favorable. Aside from a solid concept, and the required dollars, you will need to dedicate yourself full time to the business of building a successful franchise system. Don’t let anyone tell you otherwise. Franchising is a lot of work, and you cannot grow a franchise on a part-time basis. Franchising is a separate business from the one you currently operate. You need to be able to devote full time to the franchise business and hire a manager to operate your existing units—it is virtually impossible to do both. As we said in Chapter 1, you want to work on your franchise business, not in it.
Franchising is a full-time endeavor. Do not make the mistake of thinking you can grow a franchise on the side. You will be pulled in too many directions and not only will your franchise suffer, but also, in all likelihood, you will have wasted your resources.
Simply put, if you are growing a donut franchise, you cannot be up to your elbows in batter at your flagship location and expect to find quality franchisee candidates and support existing franchisees with training, site visits, and troubleshooting to ensure a viable enterprise. There just aren’t enough hours in the day. Imagine yourself as a full-time franchisor, where your priorities are devoted to supporting the system. This means you will no longer spend your days working on the business on which you based your system. So, if you are an auto mechanic considering franchising, recognize that you will no longer spend your workday fixing engines. If your true passion is auto repair, franchising may not really be right for you, no matter how franchisable your business really is. We will examine this philosophy more fully in Chapter 3. Life can be complicated. Perhaps you are consumed with the birth of a new baby, caring for a loved one, or putting all your resources into saving up for your child’s college tuition. Maybe your attention is diverted because you are dabbling in another career, such as selling real estate part-time. Plain and simple, if you cannot personally devote your time to building up a franchise, you may want to set the idea aside. Perhaps this sounds harsh, but it is reality, anything less than your undivided commitment will inevitably cause your operation to suffer. You want to make sure your franchisees are successful so that they will “sing” to prospects about their experience. If they are not singing, you will have a problem. Good prospects will walk away and your venture will not live up to its full potential. You
want your franchisees to tell prospects that if they had it to do all over again, they would still buy this franchise, or that they want to buy additional units. Those are the testimonials all franchisors strive for. A thriving franchise system requires a good concept, proper capital, and good management. But if the good concept is all you have, you probably can find the other two. Still, you must weigh your options—and the potential risks—very carefully.
IN SUMMARY Even if you are sold on franchising, your concept must be truly franchisable in order to succeed. Before you move full speed ahead, be sure that you have the time, money, and advisors to see the endeavor though. Read as much as you can on the topic, and speak to existing franchisors to understand what it takes to build a solid system. To franchise, you will need: To ascertain that your company is indeed franchisable. Between $100,000 and $150,000 in capital to properly put together your franchised business. At least one proven operation that has been in existence for at least six months to a year. To devote yourself to the venture or it will never reach its potential. To hire an experienced franchise expert who can help you get your company off the ground.
3 Not All Roses
our concept is solid, you are properly capitalized, and you have put together a smart management team. But that does not put you on easy street. Far from it. Even franchisors who have sold thousands of units run into their share of trials and tribulations. Put a group of franchisors in a room together and you might be surprised to discover the number of challenges they face on a continual basis. Here is what you will likely hear: Grumbles about finding quality franchisees in a sea of interested, though in all likelihood neither qualified nor properly funded, prospects. Growing pains from new franchisors who must adjust to the role of selling franchises, as opposed to their former roles running a business that sold a product or service. Complaints about renegade franchisees who think they can run the operation better on their own rather than by following the tried-and-true methods that really work. Laments about the business lessons learned the hard way, including the level of handholding necessary to get a new franchisee up, running, and ultimately thriving. Gripes about discovering franchisees who are not functioning as owner-operators but are instead, hiring incompetent people to operate their franchises while they continue working their day jobs. Complaints about listening to franchisees who complain that they are not making enough or any money in their operations, and blaming you for the failure. In short, some people make the mistake of thinking that franchising a business will put them on Easy Street. But, as you will learn from this book, nothing can be further from the truth; and while collecting royalties and enabling franchisees to make a handsome living is indeed gratifying, franchisors must align themselves with experts who can help them on the right path. Otherwise, as one expert put it, “they wind up with so much litigation,” and perhaps in the end, with no business at all to speak of.
The Importance of Personal Rewards Plain and simple, franchisors must build and protect their brand. So it is important to understand the process, and decide if the process is, indeed, for you—ideally, before you invest your hard-earned
money and time. Remember, just because your concept is franchisable, there is no guarantee that you will enjoy growing a system.
n 2004, Jessica Pollack decided to franchise her company, Not Just Art, a successful children’s art and science facility and toy store in Oyster Bay, New York. Pollack felt she had a business model worth replicating, but to be sure, before she got into franchising she checked with experts who confirmed her beliefs. In so doing, they asked her about her financials and her operations, but no one ever asked her if franchising would be something she would personally find rewarding. Now she wishes they had. As Pollack became more immersed in the process, she discovered aspects that she did not like. For starters, what had always given her the most pleasure at Not Just Art, and a major reason for starting the company, was mentoring young children and staff, helping them to discover and express their unique selves. As a franchisor, rather than encouraging the franchisee’s creativity, she found herself having to make them into little clones of herself, which went totally against her nature and her purpose. An added pressure was that if the franchisee didn’t do things the “Not Just Art way,” and their experiences as a franchisee did not work out favorably, it was her name that would be associated with failure. There were also added costs associated with franchising besides the initial startup phase. For instance, she discovered, once she got into the game, that there were filing fees in many states and ongoing legal fees to a franchise attorney who tracked updates within each state as laws changed. “If I had paid $2,000 to an advisor” who would have provided a more honest picture about what it means to franchise, “instead of the $100,000 it took to put the franchise together, I would have been very happy,” she notes. Pollack did sell a franchise unit, which helped her recover some of her costs, but she decided to cut her losses completely and get out of the franchise business. Today, in addition to running her Oyster Bay facility, she also serves as a consultant to like-minded entrepreneurs who want to run a similar operation. And, she says, there is a silver lining to the franchise experience: It prompted her to put together the training materials she now uses as a consultant; had she not pursued franchising, she might not have put those materials together. Still, she says, she would have much preferred to find that advisor whose sole purpose it would have been to give her all the necessary information to make a truly informed decision. To the best of our knowledge there is no personality test available that helps would-be franchisees analyze if franchising actually coincides with their personal goals. Personality tests do exist for franchisees who want to know if franchising is right for them or if the system is a good fit for them, and if so, which concepts would make the best match. So, what is a would-be franchisor to do? Speak with other new franchisors and ask about their day-to-day experiences, their challenges, their likes and dislikes. Harold holds franchise forums around the country where seasoned franchisors, as well as those just starting, speak openly and ask questions about best practices. The International Franchise Association also provides opportunities to rub elbows with veteran franchisors and talk strategy. Talk to as many experts as possible. Generally speaking, they like to help.
Most franchisors agree that moving into the business of selling franchises is a tough transition. Like any field, it can have its highs and lows. So the more you know about the difficulties, the better equipped you may be at overcoming the challenges ahead.